Free Trade Agreements: what will they mean over time?

01 May 2015

Free trade agreements (FTAs) have been a hot topic of discussion lately with the announcement that negotiations towards an FTA with China are to commence. In the last 12 months agreements have been signed with Japan and South Korea.

Each of these agreements includes components dealing with agricultural products, including beef. While this appears to be a positive development, it can be difficult to understand how these FTAs will directly affect beef producers.

In general terms, the price of Australian beef in the export markets subject to an FTA will effectively be reduced when tariffs and quotas are reduced or eliminated, making the product more attractive to buyers in these markets. Theoretically, this should result in increased demand for Australian beef, which in turn should lead to improved prices for producers.

The relationship between supply and demand is, however, only one factor that affects the competitiveness of Australian beef in the international market. Other factors include exchange rates, domestic demand and domestic production, including production disruptions such as those that may occur due to drought.

So what does this mean for cattle producers?

How FTAs will influence the beef production landscape remains to be seen and local production influences, such as seasonal conditions, are likely to have a more profound and immediate effect on production.

None the less, it is important to consider long-term consequences of such developments. Such considerations should include:

1. Enterprise size

If there is a sustained increase in the beef price, producers should consider whether they would maintain the same herd size and accept the increase in prices, or alternatively consider whether this situation presents an opportunity to expand or modify their beef enterprise.

While the answer to this question will depend on many variables, Module 1 ‘setting directions’ of the MBfP producer’s manual can assist in the decision making process. This module also provides useful templates to help with setting clear business objectives and the strategic direction of a beef enterprise.

2. Carrying capacity

Producers should also take into account the current and potential capacity of the feedbase to support increased cattle numbers.

Module 2 ‘pasture growth’ and Module 3 ‘pasture utilisation’ can assist in assessing the productive capacity of a particular property and the collection of resources available on that property.

In particular, Module 2 ‘pasture growth’ helps producers develop skills in soil, pasture and grazing management in order to boost productivity and profitability.

3. Herd productivity

Other important considerations relate to the productive capacity of the herd. Producers should determine if it would be preferable to slowly increase the size of the beef herd through breeding and retaining heifers or to accelerate the process by buying heifers. There may also be opportunities to make improvements that increase fertility and weaning rates.

Module 1 ‘setting directions’ can assist producers in the decision making process and Module 5 ‘weaner throughput’ outlines practices to determine how and when to wean calves early in order to maximise production and profitability.

4. Meeting market specifications

Producers should identify the markets driving the increase in demand and the requirements and specifications of those markets and then determine whether this fits with their production system.

The preferred market specifications are different for each of the recent FTA partners. Some of these markets will complement production systems better than others.

5. Cash flow

Producers need also to calculate the cash flow implications of expanding an operation to take advantage of a perceived opportunity.

The end goal will be additional profit, but between now and then, how much cash is required to achieve the growth in profit? An example is keeping additional heifers to be in a position grow the herd through natural growth. The herd will be growing, which is an asset, but the cash income for the short term will be affected due to less heifer calf sales. The question is: how will the business be able to fund this? Cash on hand, debt funding or profits from other enterprises in the business? This will be different for all businesses.

The MBfP on-line manual can help producers answer these and many other production questions.

Summary of recent FTAs

Below is an overview of the recently signed and proposed agreements:

Korea-Australia Free Trade Agreement

Entered into force on 12 December 2014

The 40% tariff on beef will be eliminated progressively over 15 years

Japan-Australia Economic Partnership Agreement

Japan is Australia’s largest agricultural export to Japan worth $1.4 billion in 2013-14, providing an immediate and significant competitive advantage over our major competitor, the United States. Details of this agreement include:

Entered into force on 15 January 2015

Reductions in tariffs for beef over 15 years

Tariff reductions for frozen beef from 38.5% to 19.5% over time, including an initial cut of eight percentage points in the first year

Tariff reductions for chilled beef from 38.5% to 23.5%, including an initial cut of six percentage points in the first year

Proposed China-Australia Free Trade Agreement

Proposed removal of tariffs of between 12% to 25% on chilled beef meat over nine years

Proposed removal of tariffs on live animal exports of 10% within four years